10.01.2008 0

Wall Street Welfare

  • On: 10/23/2008 11:32:13
  • In: Economy
  • “Vice is a monster of such hideous mien,
    As to be hated needs but to be seen,
    Yet seen too oft, familiar with her face,
    We first abhor, then pit, then embrace.”

    —Alexander Pope

    So long, liberty.

    Washington, D.C. has become the financial capital of the nation. Perhaps of the world. And that’s exactly the way the Big Government politicians want it.

    In some ways, it’s actually ironic. The original nation’s capital under the Federal Constitution was New York City. Then, eventually, Washington, D.C. was established as the political capital. But New York was still the financial capital. No longer. The center of gravity has now completely moved to D.C. Which means that in what was once a free market economy, the tail is now wagging the dog.

    “Investors await a Senate vote on the US bailout,” reads one subheadline. “Credit markets tight ahead of Senate vote,” reads another headline. The message is very clear: private investors are awaiting government intervention to make their trading choices for them.

    And who could blame them? The intent here is not to fault Wall Street for recognizing where the center of gravity is, where the power is allocated, and the very real stranglehold that the national government will soon have on the nation’s economy. To base an investment strategy off of decisions made in Washington, in that sense, makes a lot of sense.

    Instead, the intent is to fault Washington for yet again creating a culture of dependency that threatens liberty.

    We suppose that it really began with the Federal Reserve. Normally, investors react to the Fed’s Board of Governor’s meetings, eagerly awaiting the statement to appear at 2:15PM with any potential moves on interest rates. Everyone on the floor of the stock exchange would pause. And then traders would react. Other limited investment effects would occur perhaps after a major presidential address or some other big political news. But the effects here have always appeared to be limited.

    That was before 2008. Now, the markets are increasingly reacting to the string of bailouts—totaling some $765 billion thus far: economic “stimulus”, Bear Sterns, the Foreclosure “Prevention” Act, Fannie and Freddie, etc. Now, the bailout will grow to nearly $1.5 trillion this year alone should Congress approve the latest $700 billion bailout. The national debt ceiling will grow to over $11.3 trillion (it was $9.4 trillion as recently as March).

    Having accepted this money, Wall Street is now completely dependent on “capital” from Washington. Only it isn’t even real capital. It’s yet more debt. The dirty little secret of these bailouts is that they are not even technically funded by the taxpayer. Not yet anyway.

    The government is for now borrowing in order to pay for the resolution of other people’s debts. To make a micro-comparison, that’s like using your credit card to pay for your mortgage. But make no mistake that the taxpayer is most certainly on the hook. The government is promising that, in the end, the American taxpayer will foot the bill for these obligations.

    And in the process, Wall Street may be assuming that the U.S. government has a bottomless pit of money as it holds out its hands for help. But it does not. There will come a point when there can be no more bailouts. In truth, the more bailouts there are, the more private investment is actually discouraged.

    So, be warned, investors who are now about to embrace the abhorrent: After Washington is done showering you with “rescue” packages, they will bury you. Higher taxes. More regulations. Less wealth creation.

    That’s what happens when Washington becomes the financial capital: the American taxpayer becomes the biggest investor. And in order for the economy to keep growing it will now be dependent on federal revenue. And eventually, the government will not be able to borrow more in order to pay to keep the system afloat…

    One can almost hear the shackles being latched upon the legs of the American people. So long, liberty. We hardly knew ye.

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